May 28, 2024


Has the NaBFID served its purpose well?

To state the obvious, building roads, highways, extended railway lines, etc, is expensive. The funding comes from several sources, most notably from the government. That doesn’t necessarily mean the government is printing money to pay for infrastructure projects. It’s all done through lines of credit.

With that in mind, given the government’s infrastructure and economic growth ambitions, it has set up the National Bank for Financing and Development (NaBFID). The mandate was simple enough – support the development of long-term infrastructure financing. Has it been able to do that?


The NaBFID is what’s called a Development Financial Institution (DFI). It’s an entity that ensures the government has a steady flow of money to pay for infrastructure projects.

Those projects are mainly financed by banks. However, it’s not as easy as going to a bank and asking for a loan. The short-term liability of banks against the long gestation period of the projects resulted in a liability mismatch in bank financing. It’s difficult to get medium and long-term financing.

In the 1980s, DFI did their thing and financed many core industries that cropped up in India. Going back even further, when entities like the Industrial Finance Corporation of India (IFCI) were set up in 1948, they provided more-than-adequate project financing. European countries, Japan, and the US set up similar DFIs to build and rebuild infrastructure post World War II. They mostly channelled long-term household savings.

In the 1990s, DFIs were tasked with getting private investment into the infrastructure sector. The segment was rife with ever-changing regulations, uncertain policy proposals, and a lack of long-term financing. At the time, the development-focused Infrastructure Development Finance Company (IDFC) was the new kid on the block, joining the likes of ICICI and IDBI. They were set up to finance infrastructure projects but were later converted into commercial banks.

Post-liberalisation, DFIs began to decline since they lost their exclusive status. The Credit Authorisation Scheme (CAS) was relaxed to allow banks to extend large-ticket long-term loans at low interest rates. Since the cost of funds became low, banks went on an aggressive spree to refinance outstanding DFI loans.

In 2021, Parliament passed the NaBFID Bill that gave birth to a new infrastructure financing institution. By this time, the country’s capital markets were seen as mature and had a higher risk appetite. That same year, the NaBFID was brought under the purview of the Department of Financial Services (DFS) in the Finance Ministry.

The objective of the NaBFID, among other things, was to develop a deep and liquid bond market for long-term infrastructure financing and have a framework to attract equity investments from domestic and foreign investors, including green financing.

Given the accelerated rate of infrastructure development, has the NaBFID been a success?

VIEW: Done well so far

To date, the NaBFID has sanctioned over ₹86,000 crore for projects spread across the country in diverse sectors like roads, renewable power, ports, and railways. With Viksit Bharat in mind, it was recently announced that it would sanction over ₹3 lakh crore by March 2026. In the past fiscal year, it has accumulated ₹195.2 billion through two bond issuances. That’s in line with other financial institutions that have ventured into bond sales thanks to a surge in government expenditure on infrastructure.

You’ve got to keep in mind, the NaBFID only began operations in 2022. In the 2023 January-March quarter alone, it sanctioned ₹18,560 crore. Data from the Reserve Bank of India (RBI) has shown that demand for infrastructure finance is picking up. The NaBFID has a couple of things up its sleeve. It can provide long-tenor loans and loans at a fixed rate with a long re-set period.

Rating agency ICRA said the bank remains well-capitalised thanks to a ₹20,000 crore infusion by the government. The government’s previous ₹5,000 crore grant ensured that its cost of borrowing is low since it can’t issue tax-free bonds. With its AAA rating, the NaBFID can expand its scale in the near to medium term.

COUNTERVIEW: Not that successful

When the NaBFID was set up, some people viewed this as a failure to develop a robust bond market. What’s ironic is that the institution was set up to do exactly that. One concern that hasn’t really been addressed is large debt accumulation. Given the government’s massive scale-up in infrastructure investment, initially budgeted at ₹111 trillion till FY2026, NaBFID’s capital of ₹200 billion and ₹3 trillion leverage could be inadequate.

Despite government guarantees, the cost of funds hasn’t been reduced as much as it can, since large public sectors, including state and central governments, corner most national finance savings. In its first full year of functioning, not a single rupee was sanctioned and disbursed. Despite Chairperson KV Kamath’s comments about financing in the first quarter of 2022-23, it didn’t happen.

The NaBFID’s outstanding loans increased from ₹97.54 billion in 2022-23 to over ₹350 billion per the latest abridged audited accounts. However, there were no details about specific projects and whether they were new, under construction, or completed. Concerning the bond market, there has been no movement on that front. All we have is the Finance Ministry’s advice to the NaBFID to set up a “structured partial credit enhancement facility” to deepen the bond markets.

Reference Links:

  • Development Financial Institution (DFI): Setting up of the National Bank for Financing and Development (NaBFID) – ORF
  • NaBFID has a huge mandate ahead of itself; can it succeed? – Business Today
  • NaBFID expects cumulative loan sanctions to top ₹2-lakh cr in FY25 – Business Line
  • NaBFID–One more infrastructure-finance institution takes wing – The Financial Express
  • Is NaBFID a failed institution? – Deccan Herald

What is your opinion on this?
(Only subscribers can participate in polls)

a) The NaBFID has served its purpose well.

b) The NaBFID hasn’t served its purpose well.


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